In 2019, an amendment was introduced to the Insolvency and Bankruptcy Code, 2016 (“Code”) vide which Section 5 of the Code was amended to clarify that the resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger.
However, prior to such an amendment also, the intent of the Code and the judiciary supported the Mergers & Acquisitions (“M&A”) deals such as the successful merger of Synergies Castings Limited (resolution applicant) with Synergies Dooray Automotive Limited (corporate debtor).
The increase in M&A deals under the Code is undeniable and quite evident from 12% of the total M&A deals taking place through the insolvency process under the Code by 2018, touching USD 14 billion.
With the advent of unprecedented COVID-19 and the suspension of the Code till March 2021, the success of the Code is taken aback and needs reforms to achieve its objective after the suspension is lifted. It is highly likely to see the wave of applications being filed for initiation of insolvency proceedings under the Code.
At this instance, every business, every industry, and every economy is reeling under stress, the likelihood of finding a resolution applicant to rescue a failing company is remote and most of the distressed companies would see corporate death by liquidation as against the objective of the Code.
Further, the values of the companies have considerably decreased in the COVID-19 period and made it quite difficult for those companies to find possible resolution under the Code. At this juncture, it is pertinent to note that necessary amendments to the Code have become an exigency.
While having made great strides in the development of the jurisprudence of insolvency and bankruptcy, the legislature has remained receptive on how to streamline and improve the efficacy of the process.
In October, 2020, the sub-committee of the insolvency law committee recommended a regulatory framework for the pre-pack insolvency resolution process. A pre-packaged insolvency framework is a viable option for the corporates and when the company is at nascent stages of distress, it also presents an opportunity for an interested investor to gain leverage.
In contrast, the regular insolvency process is more deliberate and lengthy, and involves the invitation of resolution plans, soliciting votes on the resolution plan, and obtaining NCLT approval before implementation. Pre-packaged plans are intended to minimize the disadvantages of the insolvency process such as delay at the instance of the judiciary and the litigations filed by various stakeholders and the cost involved in such process, while still taking advantage of many of its benefits.
However, the draft framework proposed by the sub-committee needs careful deliberation and modifications for attaining its true objective.
One of the key considerations behind the Code was the creditor-in-possession mechanism, however, in the pre-pack framework, as the management does not shift to insolvency resolution professional or the resolution professional, there is a high possibility of misuse of the situation by the delinquent promoters.
“The pre-pack framework needs to have necessary checks and balances during the pre-pack process. One important aspect is to remove information asymmetry for the competing investors.”
If one were to closely analyze the delays in the insolvency process under the Code, a key factor is the delay in admission and approval of IBC cases.
Time is of the essence in an insolvency resolution process, both for the creditors and for the investors and therefore any delay in the approval of plans post-approval of the committee of creditors adds to uncertainties of implementation and deterioration of value. This requires immediate legislative intervention especially given the fact that the scrutiny for both admission and approval of plans is limited.
The success of the Code is unparalleled as compared to the past insolvency legislations, however, a timely intervention by the legislature is required to ensure the efficacy of the Code and to make the institutional framework more efficient and quicker.
Further, given that trust in and reliance on the legislation has been steadily increasing, it is incumbent upon the government to address such concerns to ensure that the Code remains relevant legislation even in an ever-changing landscape.
This article was originally published in The Economic Times on 20 March 2021 Co-written by: Anoop Rawat, Patner; Varsha Gupta, Associate. Click here for original article
Contributed by: Anoop Rawat, Patner; Varsha Gupta, Associate
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